How Private Fund Advisers Should Assess the New DOL Rule

Many private fund advisers are wondering: How does the DOL Rule apply to my business? Why does it apply to my business?

The DOL Rule that went into effect on June 9, 2017 was intended to require those providing advice to certain investors to do so using a fiduciary standard of care.[1] While arguably the biggest impact of the Rule falls on broker-dealers and investment advisers with retail clients, advisers to private funds may also be affected. The Rule has implications for private fund advisers that accept IRA and/or ERISA Plan investors, regardless of whether the private fund is considered to hold “plan assets.”[2]  While such advisers already must adhere to a fiduciary standard to their clients (here, private funds), the Rule regulates, among other things, when that private fund adviser may additionally become a fiduciary to the fund’s IRA and/or ERISA Plan investors.

To the extent the Rule may apply, the adviser may be limited in the way it can market investment products (i.e., interests in the private investment funds) to current and prospective IRA and ERISA Plan investors.  The concern is that marketing communications, routine performance reporting, and other communications might cause the private fund adviser to become an ERISA fiduciary with respect to a decision by the IRA or ERISA Plan investor to invest in, continue holding, or redeem a private fund interest.

For example, under the Rule, for hedge funds, it is possible that regular and course-of-business investment communications, such as quarterly investor letters, could be viewed by regulators as a “recommendation” or “advice” to continue holding an interest in the fund, thereby triggering the Rule requirements to document that the adviser is acting with a fiduciary standard of care or “in the best interests” of the IRA or ERISA plan investor.  As another example, under the Rule, for private equity advisers in or about to be in fund-raising, communications to existing investors (in a prior, closed fund) could potentially be seen as “recommendations” or “advice” to invest in the new fund.

Ascendant recommends private fund advisers review and monitor their communications and practices, particularly where the type or stage of the fund triggers potential application of the Rule.[3]

Extension of Fiduciary Relationships to Fund Investors

The Rule can extend the fiduciary relationship to the fund’s underlying IRA and/or ERISA Plan investors.  Essentially, the DOL expanded the concepts of what is fiduciary investment advice and/or a recommendation.[4] As a result, private fund advisers marketing investment products (fund interests) to IRA or ERISA Plan investors may now have to evidence and document that they are acting with a fiduciary standard of care in recommending such products to such investors. There are carve-outs to the Rule.

Impartial Conduct Standards

During the Transition Period, from June 9-December 31, 2017, fiduciaries who cannot take advantage of a carve-out must meet the “impartial conduct standards.”

The “impartial conduct standards” require fiduciaries to meet three requirements:

1) the fiduciary must give advice in the investor’s “best interest,” which means advice must be prudent, meet professional standards, and be based on the best interest of the investor and not on any competing interest of the fiduciary;

2) the fiduciary must charge no more than reasonable compensation; and

3) the fiduciary must not make any misleading statement (which includes material omissions) about transactions, compensation, or conflicts of interests.

Carve-Out for IRA/ERISA Plan Investors advised by an Independent Fiduciary

The Rule provides a significant carve-out for certain IRA and/or ERISA Plan investors. If the investor fits within this carve-out, the private fund adviser will not be considered a fiduciary to that investor.

For example:

  • An investor separately represented by an independent fiduciary that is a bank, insurance company, other registered investment adviser, or registered broker-dealer may satisfy the carve-out.
  • An investor represented by some other independent fiduciary may satisfy the carve-out, provided the independent fiduciary has under management or control at least $50 million in total assets, e.g., an institutional ERISA Plan represented by its independent plan committee managing or controlling at least $50 million in total plan assets.

The private fund adviser must know or have reasonable belief that the independent fiduciary is capable of independently evaluating investment risks and is actually exercising that independent judgement.


What should private fund advisers do to comply with the new DOL Rule?

Identify IRA and ERISA Plan Investors

First, all private fund advisers should identify any IRA and ERISA Plan investors in their private fund(s). Private fund advisers in the process of fund-raising or onboarding new investors must identify the potential IRA and ERISA Plan investors.

Notice to Existing IRA and ERISA Plan Investors

Second, once investors are identified, private fund advisers should determine if a carve-out applies.

Advisers to funds that offer redemption or withdrawal rights (as opposed to private equity funds that do not) should confirm eligibility for the above carve-out by sending the identified IRA and ERISA Plan investors a written disclosure notice that requires the investor to make the representations that are the elements of the carve-out.[5]

Disclosure to the investor must state:

  1. the adviser is not undertaking to provide to the investor impartial investment advice or to act in a fiduciary capacity to the investor regarding the investment,
  2. the adviser has a financial interest in the equity interests of the private fund,
  3. the adviser’s interests in the private fund may conflict with the investor’s interests, and
  4. the adviser does not receive fees from the investor for the provision of investment advice to the investor, but rather for the advice to the private fund.

Representations from the investor must include:

  1. the investor is represented by an independent fiduciary (under ERISA and/or the IRS) that is either:
  2. a bank, insurance carrier, registered investment adviser, or registered broker dealer; or
  3. an independent fiduciary that holds, or has under management or control, total assets of at least $50 million,
  4. the independent fiduciary is also independent from the private fund adviser, and
  5. the independent fiduciary is capable of evaluating investment risk independently, generally and regarding the private fund investment.


Private fund advisers with new or contemplated future funds or investors should determine if updated subscription documents language is required, and amend it as necessary to reflect the aforementioned disclosures and investment representations.

Private fund advisers who do not receive adequate assurance from the IRA or ERISA Plan investors, but who want or need to keep them in the existing fund, should consider limiting their communications so that the communications are not misconstrued as “recommendations.” For example, such advisers could provide little or no fund or market commentary, and provide only factual performance, fee, and expense information; and/or they could include a legend or disclaimer on all communications, providing information similar to the language in the above-described notice. Private fund advisers in fundraising or about to start a new fund may want to consider refusing investors if, after working with legal counsel on the subscription documents language, they do not receive adequate investor assurances.

The DOL has stated that during the transition period, June 9-December 31, 2017, the DOL will not pursue enforcement claims against fiduciaries who are working in good faith to comply with the applicable terms. If you need help, contact Ascendant for further information on the DOL Rule and its application to your business. 

[1] This Ascendant Guidance was not intended to be and cannot be legal advice. Please consult your legal counsel for all legal matters and interpretations. This is a summary of certain applications, and is not a complete recitation of the DOL Rule or its relevance.

[2] This includes investments by friends, family, and employee IRAs—unless all fees are waived.

[3] Advisers using co-investment structures similarly may want to review their practices relating to these co-investment or related investment vehicles.

[4] “Recommendation” is “a communication that, based on its content, context, and presentation, would reasonably be viewed as a suggestion that the recipient engage in or refrain from taking a particular course of action.”

[5] Advisers may prefer to use the negative consent method, which requires the investor to reply back to the adviser only if the investor is not able to make the representations. The ‘negative consent’ type notice should expressly delineate that the investor’s continued investment in the fund, and/or lack of redemption, constitutes agreement that such investor can make the representations necessary to remain eligible to continue as a fund investor.

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